You may have started to notice an option to pay for your purchase over a series of monthly installments, often "interest-free," on the checkout page of your favorite online store. It is not the retailer that is offering this option. It is a buy now, pay later (BNPL) app that is providing this service. Popular BNPL apps include Bill Me Later/PayPal Credit, Afterpay, Affirm, Klarna, and FuturePay.
These apps sometimes charge interest, much like a credit card, but they may offer "interest-free" periods. If you pay off your balance before the period ends, you can avoid paying interest altogether. The regular interest rates on BNPL are typically very high.
A typical BNPL interest-free offer might break a purchase into four equal installments, the first one paid at checkout and the other three paid every two weeks. You apply right at checkout so it takes no extra time to use it (if approved).
The trouble starts if you miss a payment or don't have sufficient funds in your linked account. You can be charged a late fee and possibly a returned payment fee. If you default on your payments, the full amount is charged to your debit card immediately and your account closed.
Unlike 0 percent intro APR credit cards, which waive interest for a certain period of time, most BNPL accounts often come with deferred interest. Deferred interest means that if you don't pay off your balance in full by the end of the six months, you'll be charged interest on the whole amount, dating back to the original purchase date -- even if you only have a few dollars left to repay. In contrast, with a 0 percent credit card, you'd only pay interest on the remaining balance.
Young people starting out hoping to build credit by making on-time payments are out of luck with BNPL apps. In most cases, payments aren't reported to the credit bureaus, so you won't be building a positive credit history. Be sure though that any late or missed payments will be reported.
BNPL's short repayment periods and interest-free offers can save you money on interest and help you avoid falling into debt. However, it's crucial to both your bank account and your credit score that you make sure you can afford the agreed-upon payment schedule. Merchants love them because they help boost sales, so they are going to become more prevalent.